Pray Projects Private Limited vs Mr. Rajender Kumar Girdhar

IN THE MATTER OF: Pray Projects Pvt. Ltd. ...Appellant C 1/2 Satyam Shopping Centre, M.G. Road, Ghatkopar East, Mumbai-400077.

Versus

Rajender Kumar Girdhar ...Respondent Address; 601, Sunshine Plaza, Sixth Floor, Naigaum Cross Road, Dadar (East), Mumbai-400014. Present: For Appellant : Mr. Vivek Kohli, Sr. Advocate with Mr. Javus Rawal and Mr. Harsh, Advocates. For Respondent : Mr. Lzafeer Ahmad BF

With

Company Appeal (AT)(Insolvency) No. 941 of 2022

IN THE MATTER OF: Fervent Securities Pvt. Ltd. ...Appellant Office No. - 102, First Floor, Plot-374, Nebesa, Co-op. Housing Society Ltd., Mumbai-400019.

Versus Rajender Kumar Girdhar ...Respondent Resolution professional of Mayurpankh Properties Pvt. Ltd. At C-703, Marathon Innova, Off G.K. Marg, Lower Parel (West), Mumbai-400013.

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 1 of 35 Present: For Appellant : Mr. Amish Tandon and Mr. Vishwanath Iyer, Advocates. For Respondent : Mr. Lzafeer Ahmad BF

JUDGMENT

(Date: 3.3.2023)

[Per.: Dr. Alok Srivastava, Member (Technical)]

1. Two appeals viz. CA(AT)(INS) No.938/2022 (filed by

Appellant Pray Projects Private Limited) and CA(AT)(INS)

No.941/2022 (filed by Appellant Fervent Securities Private Limited)

have been preferred under section 61 of the Insolvency and

Bankruptcy Code, 2016 (in short 'IBC') assailing the common order

dated 3.6.2022 passed by the Adjudicating Authority (National

Company Law Tribunal, Mumbai) in IA 3155/2019 in CP(IB)-

4190(MB) of 2018 (in short 'Impugned Order'). Both the appeals

are being disposed of by this common judgment.

2. The Appellants in the two appeals are aggrieved by the

Impugned Order whereby the claims lodged by both the Appellants

in the Corporate Insolvency Resolution Process (in short 'CIRP') of

the corporate debtor Mayurpankh Properties Private Limited (in

short 'MPPL') have been held as preferential, undervalued and

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 2 of 35 fraudulent transactions under sections 43, 45 and 66 of the IBC

and thereby they are not binding on the corporate debtor.

3. In brief, the Appellant Pray Projects Private Limited (in short

'Pray Projects') has stated that in 2014, it gave an unsecured loan

amounting to Rs. 5 crores to Sunshine Housing Infra Pvt. Ltd. (in

short 'SHIPL') on which interest was being paid by SHIPL till

October, 2016, but thereafter it stopped paying interest to the

Appellant. The Appellant Pray Projects has further stated that to

reduce the burden of loan and interest that SHIPL was carrying, it

offered in the year 2018 to arrange purchase of some area in the

real estate project "Chambers" being developed by the corporate

debtor MPPL and so SHIPL transferred the aforesaid principal sum

of Rs. 5 crores to the Appellant Pray Projects for onward transfer to

the corporate debtor as consideration for an Option Agreement

(called "Option Agreement-I"). This agreement which was signed by

the corporate debtor MPPL with Pray Projects, provided Pray

Projects an option for purchase of the option area in the

"Chambers" project of the corporate debtor. The Appellant Pray

Projects has further stated that it paid as aforementioned a total of

Rs. 5 crores in five tranches to the corporate debtor as

consideration for the Options Agreement which was signed by

them on 15.12.2018. This agreement gave an option to the Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 3 of 35 Appellant Pray Projects to purchase the option area in the project

within 90 days from the date of receipt of full occupation certificate

of the project and the Appellant Pray Projects was given an

irrevocable right to buy option area of 1315 sq.ft. @ Rs.45,627/-

per sq.ft., but there was no obligation on Pray Projects to purchase

the option area. The Appellant has also stated that vide letter

dated 17.12.2018, it exercised its right to purchase the option

area.

4. The Appellant Pray Projects has further stated that the

corporate debtor was admitted into insolvency by the order of the

Adjudicating Authority dated 18.12.2018, though the Appellant

Pray Projects was not aware of the that proceedings relating to

admission of the application for insolvency resolution of the

corporate debtor. The Appellant Pray Projects has further stated

that it submitted its claim of Rs. 5 crores in the CIRP of the

corporate debtor on 9.1.2019 as an unsecured financial creditor

and its status as unsecured financial creditor was accepted by the

Resolution Professional alongwith admission of his claim.

5. With regard to the second appeal viz. CA(AT)(INS) No. 941 of

2022, the Appellant Fervent Securities Private Limited (in short

'Fervent Securities') has stated that it provided an advance of Rs. Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 4 of 35 One crore to the corporate debtor and an Option Agreement dated

17.12.2018 (called 'Option Agreement - II') was signed between the

Appellant Fervent Securities and the corporate debtor by which the

Appellant was granted an irrevocable right, but not an obligation,

to purchase an Option Area measuring 6500 sq.ft. at the rate of

Rs.26,923 per sq. ft. in the "Chambers" project located at Andheri

(West) in Mumbai. The Appellant Fervent Securities has stated

that the sum of Rs. One crore was advanced to the corporate

debtor and in consideration of the same, Option Agreement -II was

executed with the corporate debtor. The Appellant Fervent

Securities has also stated that it was not aware of the on-going

proceedings relating to section 7 application against the corporate

debtor and therefore the Options Agreement was signed by it as a

purely commercial transaction at arm's length.

6. Both the Appellants have stated that the corporate debtor

was admitted into insolvency vide order of the Adjudicating

Authority dated 18.12.2018 and the Respondent Rajender Kumar

Girdhar was appointed as Interim Resolution Professional (IRP) for

conducting the CIRP. They have further stated that the

Respondent appointed Sharma Goel & Co. LLP as transaction

auditor of the corporate debtor by a decision taken in the 3rd

meeting of the Committee of Creditors (in short 'CoC') held on Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 5 of 35 15.4.2019 and the transaction auditor submitted its report on

26.7.2019, but this Transaction Audit Report (in short 'TAR') was

not shared with the Appellants even though allegations about

transactions of the Appellants with the corporate debtor were

included in the said TAR.

7. The Appellants have further stated that TAR states that the

corporate debtor was used as a conduit for transfer of funds from

one group company (a related party) to another group company

(another related party of the corporate debtor) with the active

connivance and participation of both the Appellants in transfer of

funds. They have further stated that consequent to the receipt of

TAR, a miscellaneous application MA 3155/2019 was filed by the

Respondent and the Impugned Order was passed in the said

miscellaneous application holding the transactions made by both

the Appellants with the corporate debtor as contravening sections

66, 43 and 45 of the IBC, and as such those transactions have

been held to be null and void, and consequently claims lodged by

both the Appellants in the CIRP of the corporate debtor have been

held to be not binding on the corporate debtor.

8. We heard the oral arguments of the Learned Senior Counsel

and Learned Counsel for the respective Appellants and the Learned Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 6 of 35 Counsel of the Respondent in the appeals and also perused the

record.

9. The Learned Senior Counsel for the Appellant Pray Projects

has argued that the Appellant was unaware of the imminent

initiation of CIRP of the corporate debtor and it entered into

separate Option Agreements with the corporate debtor as genuine

commercial transactions relating to real estate property, which was

done at an arm's length by the Appellants. He has further

submitted that the Respondent admitted the claims of Appellants

as unsecured financial creditor on the basis of the claim forms

submitted by the Appellants and the transfer of funds by the

Appellants to the corporate debtor is evidenced by bank account

statements.

10. In connection with the transactions made by Pray Projects,

the Learned Senior Counsel has explained that in the year 2014,

Pray Projects advanced a sum of Rs. 5 crores by way of loan to

SHIPL and bank statement of Pray Projects clearly show that such

payment was made by Pray Projects to SHIPL regarding which

regular interest amount was being paid by SHIPL to Pray Projects

from time to time till the year 2016. He has further explained that

SHIPL felt the burden of principal amount of the loan and interest Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 7 of 35 and so offered to Pray Projects an option to purchase some space

in the "Chambers" real estate project being developed by

MPPL/corporate debtor, which is a related party of SHIPL against

adjustment of the said loan. Since this project of the corporate

debtor was expected to be completed before the project undertaken

by SHIPL, Pray Projects decided to go with the project of the

corporate debtor and in this connection, it signed an Option

Agreement-I dated 1512.2018 by which an area of 1325 sq.ft. was

to be placed as option for purchase in the 'Champers' project with

the Appellant. He has further submitted that the Appellant Pray

Projects filed a claim of Rs. 5 crores, which was admitted by the

Respondent/Resolution Professional after due verification and Pray

Projects was also made part of the CoC as an unsecured financial

creditor being unrelated party of the corporate debtor.

11. In relation to the transaction entered into by the Appellant

Fervent Securities, the Learned Counsel for Appellant Fervent

Securities has explained that the Appellant Fervent Securities

advanced a sum of Rs. 1 crore to the corporate debtor on

17.12.2018 and another Option Agreement -II was signed between

the Fervent Securities and the corporate debtor by which

irrevocable right was granted to the Appellant Fervent Securities

which did not carry an obligation to purchase the option area Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 8 of 35 admeasuring 6500 sq.ft. @Rs.26923/- per sq.ft. It was also agreed

that this loan amount shall be adjusted against the total option

consideration of Rs.17.50 crores. He has also contended that

without obtaining a proper valuation of the property in Option

Agreement the Adjudicating Authority has decided that the

transactions were undervalue which is not correct.

12. The Learned Senior Counsel for the Appellant Pray Projects

has claimed that since the Option Agreement signed by the

Appellant was done at an arm's length and they were not aware of

the imminent initiation of CIRP of the corporate debtor, the

transactions were done in good faith and therefore, the Impugned

Order passed by the Adjudicating Authority on the avoidance

application MA 3155/2019 which extinguishes the claims

regarding the amounts advanced by both the Appellants to the

corporate debtor is not correct and should be set aside. He has

added that the Appellant is not related party of the corporate

debtor and their claims are valid claims and should be considered

in the insolvency resolution of the corporate debtor.

13. The Learned Senior Counsel for Appellant Pray Projects has

further argued that during the course of CIRP of the corporate

debtor, a transaction audit was undertaken by the Resolution Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 9 of 35 Professional for the period 1.4.2015 to 18.12.2018 and on the

basis of the TAR an avoidance application being MA No.

3155/2019 under sections 43, 45 and 66 of the IBC was filed by

the Respondent against both the Appellants and certain other

parties on which the Impugned Order come to be passed by the

Adjudicating Authority.

14. The part of the Impugned Order with which both the

Appellants are aggrieved is as follows:-

"(i) The claim lodged by Respondent Nos. 1, 2 and 3 against the corporate debtor emanates from fraudulent transactions under section 66 of the Code and also hit by the undervalued transaction and therefore is not binding on the Corporate Debtor."

(In MA 3155/2019, Respondent No.1 is Appellant Pray Projects

and Respondent No. 2 is Fervent Securities)

15. We first look at the transactions between Pray Projects,

SHIPL and the corporate debtor beginning with the loan claimed to

be given by Pray Projects to SHIPL in the year 2014. The Appellant

Pray Projects has filed bank account statement of its account No.

00000033568472338 maintained in State Bank of India,

Ghatkopar (East Branch), Mumbai (attached at pp.53-54 of appeal

paperbook, Vol. I in CA (AT)(Ins) No. 938 of 2022). The bank

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 10 of 35 account statement shows that an amount of Rs.1,00,00056/- was

remitted to SHIPL on 24.1.2014 and another amount of

Rs.4,00,00,056 was remitted to SHIPL on 29.1.2014. There is no

record or document submitted by the Appellant to show the

purpose for which this amount was remitted by Pray Projects to

SHIPL. We also note from the bank account statement submitted

by Pray Projects that it gave 4 cheques viz. cheque no. 444061

dated 10.12.2018 for an amount of Rs. 1 crore, cheque no. 444062

dated 11.12.2018 for an amount of Rs. 1 crore, cheque no. 444063

dated 12.12.2018 for an amount of Rs. 1 crore, cheque no. 444064

dated 13.12.2018 for an amount of Rs. 1 crore, all in favour of

Mayurpankh Properties Private Limited and a 5th cheque no.

444065 dated 14.12.2018 for an amount of Rs. 1 crore in favour of

Mayurpankh Private Limited. Thus, a total amount of Rs. 4 crores

was transferred to MPPL between 10.12.2018 to 13.12.2018 and

an amount of Rs. 1 crore was transferred to Mayurpankh Private

Limited on 14.12.2018 (details are attached at pp.55-56 of appeal

paperbook, Vol.I in CA 938 of 2022). Another bank account

statement of Pray Projects is attached at pg. 57 of the appeal

paperbook, Vol.I in CA 938 of 2022, which includes transactions

between Pray Projects and SHIPL and transfer of funds from Pray

Projects to the corporate debtor.

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 11 of 35

16. From the above-mentioned bank statements showing

transactions of various amounts, it is clear that Pray Projects

transferred an amount of a little over Rs. 5 crores to SHIPL in the

year 2014, but since no document is submitted as to why such

amount was transferred, the purpose for transfer of this amount is

not clear. Further, SHIPL transferred a total of Rs. 5 crores in five

different tranches starting from 11.12.2018 till 15.12.2018 in

favour of Pray Projects. It is claimed this amount has been given to

Pray Projects by SHIPL against the loan of Rs. 5 crores given by

Pray Projects. Further Pray Projects transferred Rs. 5 crores to the

corporate debtor between 10.12.2018 to 14.12.2018. This amount

of Rs. 5 crores was transferred to SUIL and STPL between

11.12.2018 to 15.12.2018 as is evident from bank statement, and

it is corroborated by the Transaction Audit Report.

17. The recitals and clauses of the Option Agreement-I, which are relevant, are as follows:-

"OPTION AGREEMENT

THIS OPTION AGREEMENT made at Mumbai on this 15th day of December in the Christian Year Two Thousand Eighteen.

BETWEEN

M/S MAYURPANKH PROPERTIES PRIVATE LIMITED....

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 12 of 35 AND

M/S. PRAY PROJECTS PVT. LTD. .........

xx xx xx xx

B. The Parties hereto have agreed that the Company

would grant to the Option Holder an option to purchase Option Area (as defined hereinafter) in the Project on the terms to be mutually agreed between the Parties;

C. The Company is now desirous to grant to the Option Holder an irrevocable right but not the obligation to purchase Option Area in the Project and the Option Holder is desirous to obtain the right but not an obligation to purchase the Option Area in the Project from the Company, in accordance with the terms and conditions herein agreed and specified;

xx xx xx xx

ARTICLE 1 GRANT OF OPTION xx xx xx xx

1.2 The Option granted under this agreement may be

exercised by the Option Holder at any time within 90 days from the date of receipt of full Occupation Certificate of the Project from the development authorities ("the Option Period").

xx xx xx xx

ARTICLE 2 OPTION CONSIDERATION

2.2 On or before execution of this Agreement, the Option

Holder has advanced / Loan a sum of Rs.5,00,00,000/- (Rupees Five Crore only) ("the Option Advance") to the Company to be dealt with in the manner set out hereinafter;"

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 13 of 35

18. The Option Agreement-II signed between the Fervent

Securities and the corporate debtor MPPL is attached at pp.65-70

of the appeal CA 938/2022 Vol.I. The relevant parts in the recital

and clauses in this Option Agreement are as follows:-

"OPTION AGREEMENT

THIS OPTION AGREEMENT made at Mumbai on this 17th day of December in the Christian Year Two Thousand Eighteen.

BETWEEN

M/S. MAYURPANKH PROPERTIES PRIVATE LIMITED....... AND

M/S. FERVENT SECURITIES PRIVATE LIMITED........

xx xx xx xx

WHEREAS:

xx xx xx xx

B. The Parties hereto have agreed that the Company

would grant to the Option Holder an option to purchase Option Area (as defined hereinafter) in the Project on the terms to be mutually agreed between the Parties;

C. The Company is now desirous to grant to the Option Holder an irrevocable right but not the obligation to purchase Option Area in the Project and the Option Holder is desirous to obtain the right but not an obligation to purchase the Option Area in the Project from the Company, in accordance with the terms and conditions herein agreed and specified;

xx xx xx xx

ARTICLE 2 - OPTION CONSIDERATION

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 14 of 35 xx xx xx xx

2.2 On or before execution of this Agreement, the Option Holder has advanced / Loan a sum of Rs.

1,00,00,000/- (Rupees One Crore only) ("the Option Advance") to the Company to be dealt with in the manner set out hereinafter;"

19. In the Transaction Audit Report (attached in appeal

paperbook of CA 938/2022 Vol.II pp.191-294), the following has

been recorded as summary of the three option agreements entered

into by the corporate debtor, with S. Nos. 1 and 2 being the Option

Agreement-I and Option Agreement-II which are pertinent to this

judgment:-

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 15 of 35 The table extracted above shows that Pray Projects has given an advance to SHIPL totalling of Rs. 5 crores between10.12.2018 to 14.12.2018 and further an amount of Rs 3,33,60,000/- was transferred by the corporate debtor to Sunshine Urban Infrastructure Ltd (SUIL) in four transactions. Also, an amount of Rs.1,66,20,000/- was transferred to Sunshine Tracon Pvt. Ltd.

(STPL) in three transactions. The bank statement submitted by the Pray Projects shows that an amount of Rs. 5 crores was transferred by SHIPL to Pray Projects between 11.12.2018 to 15.12.2018, and further PRAY PROJECTS transferred a total amount of Rs.5 crores to the corporate debtor which was transferred immediately thereafter to SUIL and STPL as explained above. These facts also come out of the various bank statements submitted by the Appellants.

20. The transactions between Pray Projects, SHIPL, Corporate

Debtor MPPL, SUIL and STPL and the findings of the TAR can be

depicted in the form of a flow chart as following :-

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 16 of 35 Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 17 of 35

21. We now look at the transactions between the Fervent

Securities and the corporate debtor in the light of Option

Agreement-II entered between them.

22. The Appellant Fervent Securities has claimed that it

transferred an amount of Rs. 1 crore to the corporate debtor as

consideration for the option being provided to it through the

Option Agreement-II. The summary of transactions from the TAR,

which is extracted earlier in this judgment shows that an amount

of Rs. 1 crore was provided by Fervent Securities to the corporate

debtor on 17.12.2018 and an amount of Rs. 1 crore was

immediately thereafter transferred by the corporate debtor to STPL

on the same day i.e. 17.12.2018. These transactions are shown in

Flow chart-II as following:-

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 18 of 35

23. Admittedly, SUIL and STPL are related parties of the

corporate debtor since they all belong to the same group of

companies and therefore the amounts received by the corporate

debtor from Pray Projects i.e. Rs. 5 crores and from Fervent

Securities i.e. Rs. 1 crore were transferred to the corporate debtor's

related parties between 10.12.2018 to 17.12.2018 as is evident

from the summary of option agreements in the TAR which is

extracted earlier in this judgment and Flow Charts I & II. It is thus

clear that amounts paid by Pray Projects and Fervent Securities

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 19 of 35 were not retained by the corporate debtor, but were transferred to

two entities viz. SUIL and STPL which are companies in the same

group as the corporate debtor. While the interest in the property

'Chambers' project was created in favour of Pray Projects and

Fervent Securities through the two option agreements dated

15.12.2018 and 17.12.2018 respectively, the consideration

amounts were not retained by the corporate debtor, but

transferred on receipt to its related entities SUIL and STPL. Thus,

these amounts did not remain part of the assets of the corporate

debtor. The two Option Agreements thus created fiction of transfer

of property in "Chambers" Project without any consideration being

actually retained by the corporate debtor.

24. In order to examine whether the transactions undertaken

through the two option agreements are indeed avoidance

transactions, we note the following provisions in the IBC:-

"43. Preferential transactions and relevant time. -

(1) `Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44.

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 20 of 35 (2) `A corporate debtor shall be deemed to have given a preference, if-

(a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and

xx xx xx xx

(4) A preference shall be deemed to be given at a relevant time, if -

(a) It is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or

(b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date.

44. Orders in case of preferential transactions. -

(1) The Adjudicating Authority, may, on an application made by the resolution professional or liquidator under sub- section (1) of section 43, by an order:

(a) require any property transferred in connection with the giving of the preference to be vested in the corporate debtor;

45. Avoidance of undervalued transactions. -

(1) If the liquidator or the resolution professional, as the case may be, on an examination 54 of the transactions of the corporate debtor referred to in sub-section (2) determines that certain transactions were made during the relevant period under section 46, which were undervalued, he shall make an application to the Adjudicating Authority to declare such transactions as void and reverse the effect of such transaction in accordance with this Chapter.

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 21 of 35 (2) A transaction shall be considered undervalued where the corporate debtor-

(a) makes a gift to a person; or

(b) enters into a transaction with a person which

involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor,

and such transaction has not taken place in the ordinary course of business of the corporate debtor.

46. Relevant period for avoidable transactions. -

(1) In an application for avoiding a transaction at undervalue, the liquidator or the resolution professional, as the case may be, shall demonstrate that -

(i) such transaction was made with any person within the period of one year preceding the insolvency commencement date; or

(ii) such transaction was made with a related party within the period of two years preceding the insolvency commencement date.

(2) The Adjudicating Authority may require an independent expert to assess evidence relating to the value of the transactions mentioned in this section.

xx xx xx xx

66. Fraudulent trading or wrongful trading. -

(1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 22 of 35 who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.

(2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if-

(a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and

(b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor."

25. The Flow Charts I and II depicting the transactions entered

into between Pray Projects, Fervent Securities, SHIPL, corporate

debtor MPPL, SUIL and STPL make clear the following:-

(i) That an amount of a little over Rs. 5 crores was

transferred by Pray Projects to SHIPL but the purpose

of this loan/ transfer is not made clear by either Pray

Projects or SHIPL by submitting any documentary

evidence.

(ii) SHIPL transferred Rs. 5 crores in five different

tranches between 11.12.2018 to 15.12.2018 to Pray

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 23 of 35 Projects which is evident by the bank statement of

Pray Projects attached at pg. 57 of appeal paperbook

CA 938/2022, Vol.I.

(iii) Pray Projects transferred a total amount of Rs. 5

crores in five different tranches between 10.12.2018 to

14.12.2018 to MPPL (evident from bank statement at

page 57 of appeal paperbook of CA 938/2022 Vol.I).

Thus, it is clear that Pray Projects paid an amount of

Rs. 5 crore to the corporate debtor as consideration of

the Option Agreement-I signed on 15.12.2018. This

fact is included in "Summary of Option Agreements" in

TAR (attached at page 205 of Vol.II appeal paperbook

CA 938/2022).

(iv) The TAR also makes it clear that out of Rs. 5 crores

received by the corporate debtor from Pray Projects,

Rs. 3,33,60,000/- were transferred to SUIL between

10.12.2018 and 14.12.2019 and an amount of

Rs.1,66,22,000/- to STPL between 13.12.2018 to

15.12.2018.

(v) The Appellant Fervent Securities signed Option

Agreement-II on 17.12.2018 and transferred Rs. 1 Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 24 of 35 crore to corporate debtor MPPL as option advance on

17.12.2018, and this amount was in turn transferred

by the corporate debtor to the related company from

the same group STPL on the same day i.e. 17.12.2018.

26. An analysis of the various transactions which are included

in the bank account statements and TAR and which has been

shown in the Flow Charts makes it abundantly clear that whatever

amount was paid by Pray Projects and Fervent Securities as option

advance were immediately transferred on receipt to the SUIL and

STPL (which are related parties of the corporate debtor and also

companies in the same group) and thus these amounts were not

retained by the corporate debtor. It thus becomes clear that while

interest in the property 'Chambers' project of the corporate debtor

was created in favour of Pray Projects and Fervent Securities, the

consideration against these Option Agreements was not retained

by the corporate debtor and no amounts were added in the assets

of the corporate debtor. Therefore, no amounts can be claimed

from the corporate debtor in its CIRP by the Appellants Pray

Projects and Fervent Securities.

27. Section 43(2)(a) prohibits creation of interest for the benefit

of a creditor (Pray Projects and Fervent Securities in the present

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 25 of 35 appeal) in relevant time on account of liabilities owed by the

corporate debtor. The above stated preferential transactions are

preference given to persons other than related parties, and

therefore, these would be preferential transactions within the

relevant time, which is one year preceding the insolvency

commencement date viz. 18.12.2018. Therefore, these

transactions will be clearly preferential transactions as defined

under section 43(2)(a).

28. Further, we also note that the actual amounts received and

then retained by the corporate debtor from Pray Projects and

Fervent Securities as consideration against the two Option

Agreements are actually 'Nil' since the amounts received of Rs. 5

crores and Rs. 1 crore respectively were transferred immediately

thereafter to the corporate entities SUIL and STPL belonging to the

same group of companies as the corporate debtor and the effective

value received by the corporate debtor with respect to the two

Option Agreements is 'Nil'. Therefore, these transactions are also

undervalued transactions in accordance with section 46(1) (i) of

IBC. Moreover, these transactions were made within a period of

one year preceding the insolvency commencement date. Therefore,

the transactions made through the Option Agreement-I and Option

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 26 of 35 Agreement-II are avoidable transactions in accordance with

sections 45 and 46 of IBC.

29. It is further noted that the transaction in question in the

appeals and signing of the two Option Agreements has been done

within a period of one week just preceding the insolvency

commencement date (i.e. 18.12.2018) starting from 10.12.2018.

Notably, the Adjudicating Authority heard the arguments of the

parties in the avoidance application MA 3155/2019 on 10.12.2018

and reserved for orders thus:

"Heard both sides. Counsel for the Corporate Debtor admits the date (debt) as well as default. Reserved for orders."

It is clear from the above order that the corporate debtor admitted

the debt and default and thus the admission of section 7

application was almost certain. Such transactions which were

entered into when the matter had been heard and reserved for

order, and when the order would have, in all likelihood, resulted in

initiation of CIRP, are not only suspect, but they are avoidance

transactions.

30. Pray Projects and Fervent Securities have claimed that they

were not aware of the insolvency related proceedings against the

corporate debtor MPPL. It is a fact that the corporate debtor MPPL

Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 27 of 35 which entered into such agreements with Pray Projects and

Fervent Securities was very much aware that the matter relating to

admission of section 7 application against the corporate debtor

had been reserved for orders on 10.12.2018 and the corporate

debtor had admitted the debt and default. It makes the two

Option Agreements related transactions suspect as avoidance

transactions and this fact is further strengthened by findings in

the TAR. It is necessary that the assets of corporate debtor

should not be interfered with or reduced by way of avoidance

transactions to the detriment of its actual creditors, and to put

them at a disadvantage. Therefore, if the corporate debtor enters

into such transactions even though the other parties may be

entering into such transactions without being aware that such

transactions could be avoidance transactions, the fact that such

transactions are to the detriment of the legitimate interests of the

creditors of corporate debtor cannot be denied. We are, therefore,

convinced that the transactions as undertaken in relation to the

two Option Agreements are avoidance transactions which infringe

sections 43 and 45 of the IBC.

31. We also observe that there is no letter or communication of

request from the corporate debtor addressed to either Pray Projects

or Fervent Securities Private Ltd. to enter into Option Agreement. Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 28 of 35 Further, there is no resolution by the Board of Directors of the

corporate debtor or the Appellants for execution of the two Option

Agreements. Moreover, the Option Agreements are under-

stamped documents which are not duly registered. Such

deficiency in the Option Agreements, particularly when they were

executed after the section 7 application case had been reserved for

order, raises grave doubt about the bonafide nature of the

documents relating to Option Agreements and whether they were

really executed at arm's length. Therefore, we are of the view that

such transactions which are also 'circular' in nature as is evident

from the flow charts given in this judgment earlier, were meant to

defraud the actual creditors of the corporate debtor by creating an

interest in the assets of the corporate debtor in favour of such

alleged creditors as the Appellants through 'fictitious' transactions,

when even the consideration for such transactions did not remain

in the corporate debtor's account.

32. We also consider the arguments of the Learned Senior

Counsel of Appellant Pray Projects that TAR was not in the

knowledge of the Appellants, even though there were findings

against them in the TAR. In this connection, we peruse e-mail

dated 26.7.2019 and another e-mail dated 22.8.2019 (both

submitted with additional affidavit by the Respondent vide Dy. No Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 29 of 35 40859 dated 7.11.2022) that the draft TAR and the final TAR

respectively were shared with the Appellants Pray Projects and

Fervent Securities on email id 'prayprojects@gmail.com' and e-

mail ID 'Vimal Savla vrs.deluxe@gmail.com' respectively.

Further, the minutes of the 7th meeting of the CoC held on

28.8.2019 show that the TAR was considered as item 5 in the

agenda and the Resolution Professional informed the CoC

members that he was in the process of filing an application before

the Adjudicating Authority for avoidance transactions identified

under sections 43, 45 and 66 of the IBC, which information was

noted by the CoC (pp.15-16 of the additional affidavit filed by the

Respondent/Resolution Professional).

33. The Learned Senior Counsel for Appellant has referred to the

judgment of this Tribunal in the matter of Regen Powertech Pvt.

Limited vs. Wind Construction Pvt. Ltd. [CA (AT) (Ins) No. 349

of 2022], wherein the following is held:-

"38. Barring the aforesaid 'Reliefs' / "Directions' being sought for, by the "Appellant' / 'Applicant' in IA(IBC/489(CHE)/2021 in IBA/1099/ 2019, there are no 'Convincing Tangible' / 'Documentary Materials' to fortify the 'Plea' of the 'Appellant / "Applicant' that the 'Business of the 'Corporate Debtor was carried out by the Respondents with a 'Dishonest Intention' and, especially, to 'Defraud' the 'Creditors'. To put it precisely, the averments projected by the 'Appellant' / 'Applicant' in IA (IBC/489(CHE/2021 in IBA/1099/2019 do not come within the 'Four Parameters', of Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 30 of 35 the ingredients of Section 66 of the Insolvency and Bankruptcy Code, 2016). Viewed in that perspective, the 'Impugned Order' dated 01.07.2022 in IA(IBC/489(CHE)/2021 in IBA/1099/2019 passed by the 'Adjudicating Authority' (National Company Law Tribunal, Division Bench - II) in 'dismissing' the 'Application', without Costs, is free from any 'Legal error'. Consequently, the 'Appeal' fails."

34. The above cited judgment is distinguished on the basis of

the fact that in the present appeals, there is documentary material

to support and strengthen the plea of the Resolution Professional

that said option transactions were carried out in the relevant

period by the corporate debtor and were therefore in contravention

of sections 43 and 45 of the IBC. The bank statements, the Option

Agreements provide substantial documentary proof of fact that the

transfer of funds by the Appellants to the corporate debtor and

their almost immediate transfer to SUIL and STPL which are

companies of the same group as the corporate debtor is clearly

indicative of the fact that the amounts in question were siphoned

off to these entities by the corporate debtor, thereby reducing the

asset base of the corporate debtor in an illegal manner.

35. We note that the 'Chambers' project was mortgaged to ICICI

bank with the condition no third-party rights would be created in

respect of any property in 'Chambers' project by the corporate

debtor, but there is no evidence of any NOC being obtained by the Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 31 of 35 corporate debtor from the ICICI Bank before executing the option

agreements with both the Appellants. We also note that Option

Agreement-1 and Option Agreement-2 are insufficiently stand and

not registered and therefore, they cannot even otherwise be relied

upon for enforcement of any right of Appellants on that basis.

These deficiencies and discrepancies go to show that these

agreements were entered into by the corporate debtor in haste

after the Adjudicating Authority had reserved orders of the section

7 application on 10.12.2018. Such action by the corporate debtor

is not only suspicious, but also is clearly fraudulent in that they

seek to put the actual creditors of the corporate debtor at clear

disadvantage by keeping out certain assets from the overall asset

base of the corporate debtor.

36. The Learned Senior Counsel for Appellants has cited the

judgment of this Tribunal in the matter of Renuka Devi

Rangaswamy vs. Regen Powertech Pvt. Ltd. (CA (AT) (INS.) No.

357 of 2022), wherein the following has been held:

"35. It is the 'Obligatory Duty', on the part of the 'Appellant' to prove the subjective satisfaction of this 'Tribunal' that 1) 'An Individual', must be knowingly carrying on the business with the 'Corporate Debtor', 2) Such an 'Individual', ought to have a 'Dishonest Intent', to 'Defraud' the 'Creditors'.

36. No wonder, the ingredients of Section 66 (1) and 66 (2) of the Insolvency & Bankruptcy Code, 2016, operate in a different field. It must be borne in mind, that for 'Fraudulent Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 32 of 35 Trading' / Wrongful Trading', Relevant Facts* / 'Acceptable Materials', are to be pleaded by a 'Party', by providing requisite 'details' / adequate 'facts, to fall within the parameters of Section 66 of the I & B Code, 2016."

37. In connection with the judgment in the matter of Renuka

Devi Rangaswamy (supra), we note that it is the duty of the

person making the allegation to prove to the 'subjective

satisfaction' of this Tribunal that an individual is carrying on

business with the corporate debtor and such an individual ought

to have a dishonest intent to defraud the corporate debtor. In the

present appeals, we find that the Adjudicating Authority had

reserved the case regarding admission under section 7 for orders

on 10.12.2018. It is important to note that the corporate debtor

admitted debt and default before the Adjudicating Authority which

is evident from the order sheet dated 10.12.2018. Therefore, it is

abundantly clear that the corporate debtor having admitted the

debt and default, was reasonably certain about the admission of

the section 7 application against him which would lead to

initiation of CIRP. It is also a fact that Pray Projects, one of the

Appellants, had received an amount of approximately Rs. 5 crores

from SHIPL in 2014 and SHIPL is a sister company of the

corporate debtor. It is, therefore, reasonable to infer that PRAY

PROJECTS had business dealing with SHIPL, a sister concern of

the corporate debtor, both belonging to the same group of Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 33 of 35 companies. To arrive at a decision regarding applicability of

sections 43 and 45, the Adjudicating authority has to be

subjectively satisfied, which he appears to have been on the basis

of the TAR in the instant case.

38. On the basis of aforesaid discussion, it is amply clear that

the Option Agreements I & II are preferential and undervalued

transactions and, therefore, they are avoidance transactions as per

sections 43 and 45 of IBC. Therefore, the two Option Agreements

No. 1 and II are declared 'null and void' and any interest created in

the property 'Chambers' project of the corporate debtor by virtue of

these Option Agreements are also declared non est in law and 'null

and void'.

39. In the light of the detailed analysis in the aforementioned

paragraphs, it is abundantly clear and established that the

payment of Rs. 5 crores made by Pray Projects to the corporate

debtor in December, 2018 did not remain with the corporate

debtor, but were almost immediately transferred to its group

entities SUIL and STPL, and Rs. One crore paid by Fervent

Securities to the corporate debtor was also not retained by the

corporate debtor, but was transferred to the group entity STPL

where SUIL and STPL are related parties of the corporate debtor as Company Appeal (AT)(Insolvency) No. 938 of 2022 Company Appeal (AT)(Insolvency) No. 941 of 2022

Page 34 of 35 the corporate debtor MPPL, SUIL and STPL belong to the same

group of companies. Thus, these amounts were not part of the

assets of the corporate debtor during the CIRP of the corporate

debtor. Therefore, the two entities Pray Projects and Fervent

Securities cannot claim any payment as a result of insolvency

resolution of the corporate debtor.

40. In view of the above, we are of the view that the Impugned

Order does not bear any infirmity and needs no intervention.

Finding the two appeals that are considered in this judgment as

being devoid of merit, we dismiss them, and dispose them of

accordingly.

41. There is no order as to costs.

[Justice Ashok Bhushan] Chairperson

[Dr. Alok Srivastava] Member (Technical)

New Delhi 3rd March, 2023

/aks/

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